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The Fiscal Drag on India's Monetary Policy

Last month's budget makes the RBI's job more complicated.

By

Vidya Mahambare

April 15, 2012 12:38 p.m. ET

As it prepares to unveil its annual monetary policy review on Tuesday, India's central bank faces a dilemma. This is not merely the classic central bank problem of balancing growth and inflation, though the Reserve Bank of India is caught between 6.1% growth and headline inflation still far above its comfort level of 5%. The bigger puzzle is that despite two years of interest rate hikes, often bold ones that ensured real interest rates are no longer negative, the RBI hasn't managed to get inflation under control.